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Banks 'form $75bn sub-prime fund' Banks plan fund to revive market
(about 4 hours later)
Some of America's largest banks are expected to announce plans later to form a $75bn (£37bn) joint fund to invest in US sub-prime mortgage debt. Some of the US's largest banks are expected to announce plans later to form a $75bn (£37bn) fund to support the ailing market for sub-prime debt.
The banks, including Citigroup and JP Morgan, are seeking to boost confidence in the sector and prevent a further dip in the price of such investments. The unusual move, which includes Citigroup and JP Morgan, aims to boost confidence in and prevent a further sell-off of such investments.
The banks are said to fear more cuts in the price of sub-prime mortgage debt, which is hitting their balance sheets. Such a sell-off would force banks, brokerages and hedge funds to write down the value of their assets.
Higher mortgage rates have sparked record sub-prime home loan defaults. This could, in turn, further tighten credit markets and hurt the economy.
This has caused a wider credit squeeze as banks and other investors have been less willing to lend to each other. 'Unwise decisions'
Analysts say the big US banks hope their move will deter the current holders of sub-prime mortgage securities from dumping them on the market at knock-down prices. Analysts say the big US banks hope their move will deter the current holders of sub-prime mortgage securities from dumping them on the market at knockdown prices.
Such a "fire sale" could intensify the credit crisis. Such a firesale would further hurt banks' bottom lines.
"Banks made unwise business decisions, and now they're scrambling to save themselves," said Steve Persky, chief executive at Dalton Invesments.
Citigroup, which is set to report third-quarter earnings later on Monday, said earlier this month that its profit for that period was likely to be 60% less than a year ago.
The FSA will support any British banks involved in the fund
The bank said it had suffered losses of more than $3bn from writing down securities backed by underperforming mortgage and loans tied to corporate buyouts.
Bank of America is also part of the talks that have been led by the US Treasury and began three weeks ago
British banks
Reports said that British banks HSBC and Barclays were involved in the move, but HSBC said it had not participated in the talks and there were currently no plans for a similar fund in Europe.
The Financial Services Authority, the UK finance watchdog, said that it would be supportive of any UK bank that participated in the fund.
The discussions are similar to those conducted in 1998 to help organise the bailout of hedge fund Long Term Capital Management.
Higher US mortgage rates have sparked record home loan defaults among people who have poor credit histories.
These defaults have hit financial markets worldwide because the sub-prime mortgages had been packaged up and sold to financial institutions around the world.
This has caused a wider credit squeeze as banks and other investors have been less willing to lend to each other because it is unclear where the bad debts lie in the system.